QBE Group has warned, ahead of its 2014 interim results report on 19 August, that the insurance profit margin for the first half of 2014 is likely to be at least 2% lower than the consensus expectation of 10%.
The group’s insurance profit margin is now likely to be 7% to 8%. The combined operating ratio is also likely to be slightly worse at 96% to 97% compared to a consensus expectation of around 93%.
This comes after the
profit warning QBE issued in December last year, when it said it expected net losses of AUS$250m for the 2013 full year.
In the latest profit guidance, QBE’s global portfolio is otherwise performing broadly in line with internal plans. Adjusting for major non-recurring items, the combined operating ratio and insurance profit margin for the first half is expected to be around 93% and 10% respectively.
Net profit after tax for the first half is now expected to be is around AU$415.6m (US$390m) and gross written premium is set to be $9.1bn (US$8.5bn), lower than the previously forecast $9.5bn (US$8.9bn).
However the group’s expense ratio is marginally ahead of the budget for the half due to strict cost discipline and accelerating the benefits from the operational transformation program, which is nearing completion in Australia, fully underway in North America and recently launched in Europe.
The insurer said the first half result has been impacted by a claims reserve strengthening of around $181.1m (US$170m) in Latin America, the majority of which relates to its Argentine workers’ compensation business, higher than expected large individual risk claims which contributed to a large individual risk and catastrophe claims charge of around 10% of net earned premium and an adverse discount rate impact of around $127.9m (US$120m) excluding Argentina.
The majority of the prior accident year claims development in Argentina relates to the workers’ compensation portfolio and follows a “thorough” review of its claims reserves. The review was instigated in response to an observed increase in litigated workers’ compensation claims costs following legislative changes in 2012 and 2013, and partly in response to recently deteriorating economic conditions in Argentina. QBE says it has adopted new and “more sophisticated actuarial models” that use explicit and a “significantly” upgraded claims inflation factor and frequency and severity assumptions.
Outside of Latin America, QBE said it experienced favourable net central estimate claims developments of around $42.6m (US$40m), with positive development in the European, Australia & New Zealand and Asia Pacific operations, partly offset by modest adverse development in North America, in a large part due to industry-wide late 2013 claims notifications impacting its crop business.
QBE said it expects the Australian and New Zealand operations to report a strong underwriting result, “comfortably ahead of the prior corresponding period”.
Standard & Poor's Ratings Services said yesterday that there was no immediate impact on the ratings on QBE Insurance Group Ltd following the group's market update on expected outcomes for its interim 2014 results. A statement read: “While the expected earnings for interim 2014 are slightly credit negative, they can be accommodated at the current rating and do not represent a downgrade trigger event under our existing negative outlook.”
The figures were converted from US dollars to Australian dollars on 30 July 2014 using XE.com. The $250m figure remains unchanged.
